Most people in America associate the Democratic Party with spending on welfare programs and the Republican Party with spending on warfare. Until reading Niall Ferguson's brilliant The Ascent of Money, I never realized that welfare and warfare have gone hand in hand for over a century. The immortal German warmonger Otto von Bismarck was the first politician to introduce social insurance legislation in the 1880s. His reasoning was not strictly humanitarian. According to Bismarck, "A man who has a pension for his old age is much easier to deal with than a man without that prospect." Bismarck was a shrewd politician who realized that when you provide people something for nothing, they will vote for you. When you go to war with France, a population sedated with entitlements is more easily malleable and controllable. David Lloyd George rolled out pensions and national insurance in Great Britain prior to World War I in order to win votes. Politicians began a century of addiction to welfare programs, as the poor voted for those that promised them the most. The world has now reached its limit of unfunded promises. The financial crisis in the last two years was caused by politicians throughout the world promising benefits to their citizens and paying for these benefits with borrowed money. Margaret Thatcher aptly summed up what has happened:

"The problem with socialism is that eventually you run out of other people's money."

The world has run out of other people's money.

Britain expanded their social welfare state during and after World War I. With demobilization in 1918, they introduced unemployment insurance as a method to keep former soldiers from disrupting their country. Winston Churchill rolled out an ever growing array of social programs to keep the lower classes from revolting. The Japanese government, after World War II, initiated national insurance for sickness, injury, childbirth, disability, death, old age, and unemployment. Nations began to cover all citizens against everything that could possibly go wrong. Is it a coincidence that the largest expansions of the U.S. welfare state occurred in the 1930's before a World War, in the mid 1960's in the midst of the Vietnam War, in 2003 at the outset of the Iraq invasion, and in 2010 as we continue to fight wars in Iraq and Afghanistan? It was essential for politicians to buy off the populace before conducting undeclared wars in far off lands. Why? Who has benefitted from entitlement spending and endless warfare? Politicians and the Military Industrial Complex benefit. The way to get elected in the U.S. since the 1930s has been to promise voters benefits while ignoring the long-term costs. The defense industry and their lobbyists benefit by creating phantom enemies around the globe and stirring up the masses through fear and propaganda. The other beneficiary has been the banking syndicate and their owned printing press called the Federal Reserve. The welfare promises and constant warfare over the last century wouldn't have been possible without the Federal Reserve and their ability to create constant inflation.

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Guns & Butter

Politicians discovered that the populace will go along with their never ending military adventures if they were bought off with promises of generous pensions, free medical insurance, subsidized housing, unlimited drug benefits, farm subsidies, tax loopholes, and thousands of other voter boondoggle payoffs. The Federal Reserve printed the fiat currency, the military industrial complex created the enemies, young Americans fought and died in foreign countries in undeclared wars of choice, and corrupt politicians promised unlimited benefits to the masses in search of votes while rigging the tax system to benefit the rich and powerful. The creation of the Federal Reserve and the Federal Income Tax in 1913 unleashed politicians from the chains of fiscal responsibility. The "guns versus butter model" was turned upside down. Before the Federal Reserve was created the U.S. had to choose between two options when spending its finite resources. It could buy either guns (invest in defense/military) or butter (invest in production of goods), or a combination of both. Politicians handed out butter to the masses and M-16 rifles to our young men. All of the New Deal and Great Society social programs are dependent upon unlimited amounts of debt to be issued for all eternity or until the entire corrupt house of cards collapses.

The beauty of socialism and the welfare state is that when a country is young and vibrant, with a rapidly growing economy, the many pay for the benefits of the few. The baby boom that occurred throughout the modern world after World War II granted politicians the means to expand their welfare pledges. The more politicians promised, the more votes they received. It was a beautiful scheme, until reality struck.

"Yet there was a catch, a fatal flaw in the design of the post-warfare welfare state. What had started out as a system of national insurance had degenerated into a system of state handouts and confiscatory taxation which disastrously skewed economic incentives."

The larger the welfare state becomes, the lower economic growth, higher inflation and lower productivity overcome the social benefits. As unions become stronger, the economic system becomes more dysfunctional and warped. The economy in a welfare state becomes bogged down in misallocation of resources, mal-investment, rules, regulations, and distorted pay structures. Incentives to increase profits are eliminated. Incentives to create new businesses and to boost efficiency are purged as bureaucracy gains increasing power. As the populations of the welfare states age, there are only a couple of alternatives for the politicians who never looked beyond the next election when passing legislation to hand out more entitlements. Politicians increase taxes on the productive to pay entitlements for the unproductive. The entitlement promises are so great in the United States that politicians couldn't possibly raise taxes high enough to pay for them. This is where a willing Central Bank steps in and prints money and allows politicians the easy out of borrowing to pay the entitlement promises. This method works until it doesn't. Ask Greece and Spain.

Turning Japanese

The welfare state really gained momentum after World War II with Japan and Great Britain leading the way. Ferguson describes the beliefs that overtook the developed world:

James Quinn is a senior director of strategic planning for a major university.
James has held financial positions with a retailer, homebuilder and university in his 22-year career. Those positions included treasurer, controller, and head of (more...)